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How to make it in the wine business

Keeping your glass — and your wallet — half full

Nearly everyone who’s enjoyed a good glass of Chardonnay (or better yet, visited the vineyard that produced it) has fantasized about going into the wine business. After all, not only is wine one of life’s great pleasures, it’s also an increasingly marketable commodity: Sales of wine in the United States increased by 2% in 2012, hitting a new all-time high of $34.6 billion, according to wine industry consultant Jon Frederikson.

But as promising as that sounds, the glass may only be half full, so to speak. That’s because making wine is an expensive, time-consuming endeavor and returns on investment can take years, if not decades, to realize. “It’s a 10- to 20-year haul,” says famed actor and former “Saturday Night Live” star Dan Aykroyd, who’s invested in wineries based near his home in Canada. Moreover, the wine business has gotten super-competitive of late, especially for small-scale entrepreneurs trying to go up against the giants that have come to dominate the industry. Consider that Constellation Brands, an upstate New York company that started nearly 70 years ago selling bulk wine to bottlers, now encompasses such labels as Robert Mondavi, Kim Crawford, Clos du Bois and Arbor Mist — all prominent wine brands unto themselves.

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In other words, those who venture into the wine business find themselves with plenty to, um, whine about, often in spite of their love of the grape and the sophisticated lifestyle they associate with it. “The glamour that people perceive is just that — perception,” says Earl Sullivan, founder of Telaya Wine in Idaho.

Of course, the wine business isn’t strictly about glamour — or money, for that matter. “You have to characterize it as an investment of passion,” says Joel Redmond, a senior financial planner at Key Private Bank who’s worked with wine entrepreneurs. Which means it can offer rewards of another sort, from connecting with the land to enjoying the liquid fruits of one’s labor. “I love the samples sent home,” says Aykroyd.

The basic math

You can’t make wine without grapes. And you can’t grow grapes without land. For most wine entrepreneurs, the big expense is the sheer acreage involved in the endeavor. And the more prestigious the place (or terroir, to use the wine-centric term), the higher the expense. In California’s celebrated Napa Valley, that can translate into a cost of up to $500,000 an acre (and it’s worth noting that a “small” vineyard can still run about five acres). Naturally, there are plenty of places beyond Napa, but prices can still be high — in California alone, figure up to $150,000 an acre for land in Sonoma and up to $80,000 an acre for land along the Central Coast, says Jeff Gutsch, a California accountant with the firm Moss Adams who specializes in the wine industry. Given that wine is now made in all 50 states, there are lots of options outside California. “I look at Washington and Oregon as sleeper markets,” says Gutsch.

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Other industry insiders tout such states as Texas, Michigan, New York and Virginia as winemaking locales with plenty of potential (and land prices that can be as little as $10,000 per acre). Just keep in mind that location counts — both in terms of the bottom line (it’s rare to see $100-plus bottles coming out of anywhere in the U.S. besides California) and, yes, the glamor factor. “Having a winery in Michigan doesn’t have the sex and sizzle of having a winery in Napa and Sonoma,” says David L. Corsun, a professor at the University of Denver who specializes in the hospitality and beverage management industries.

Not that land is the only cost. A wine entrepreneur has plenty of other capital and ongoing expenses. Start with the winemaking supplies and equipment, from the vines that must be planted to the barrels and tanks that are used to store the wine. And don’t forget staffing costs as well, from field hands to the actual winemakers (the more senior ones can command annual salaries of $100,000-plus). It can all equate to a bill of more than $30,000 per acre per year. Include the land and the total investment in the first few years can easily reach seven (or even eight) figures, a prospect that can scare away all but the most devoted oenophile. And keep in mind, it will take a good three years for the vines to start producing quality grapes, and it can be up to another three years before the wines have aged properly and are ready for the marketplace. Leave it to California winemaker David Duncan (Silver Oak Cellers, Twomey Cellars) to put the situation into perspective: “There’s a saying, ‘If you want to make a million in the wine business, start with 10 million,’” he says.

Still, there’s a way to make the math work — namely, charge a price for each bottle that builds in all those costs (don’t forget the marketing budget, either) and allows for a little profit. The only problem is that it has to be a wine that people will drink — and if it’s an expensive bottle, it has to be one they’ll pay good money to buy. “Today’s consumer is so well educated that you can’t try and fool them for long. If you don’t deliver value, they will go away,” says Charles Banks, a well-known name in California wine who now owns Terroir Capital and Mayacamas Vineyards, among other wineries.

In for a little

There’s nothing that says you have to own a vineyard to own a winery. A number of wine entrepreneurs are essentially building wine “brands” instead of actual wineries — buying grapes or juice and, in some cases, even outsourcing the bottling. “It’s a pure marketing play,” says Clayton B. Gantz, a California attorney with Manatt, Phelps & Phillips who specializes in the wine industry and also has his own vineyard. It’s not only a cheaper way to get into the business, it can also be a more expeditious one, since there’s no waiting for the vines to come of age. Indeed, the investment can be as little as five figures. For newbies, that makes it a low-risk proposition with plenty of upside, says Douglas Margerum of California-based Margerum Wine Company, a company that specializes in “custom crush” programs for wine entrepreneurs. “You can start building a brand and increase production if the wine turns out to be really good,” he says.

On the negative side: It’s a lot less romantic to own a “brand” than to own a vineyard, industry pros say. And land can be a key part of a winery’s long-term financial potential — provided, of course, that land prices rise.

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